Ever since the fall of the Berlin Wall in 1989, the former Eastern Bloc nations have been steadily closing the gap on their developed western neighbours. Years of communist rule and economic stagnation left the region decades behind western Europe and facing a sizeable task to reduce the enormous wealth superiority enjoyed by the capitalist states.
With the help of EU funding, years of infrastructure projects were put in place to modernise the region and transform it into a low-cost manufacturing base for western Europe, the US, Japan and South Korea. By the mid ‘90s, as the region’s growth potential steadily began to flourish, a number of investment vehicles offering exposure to the former communist states emerged onto the market.
While the road to parity was undoubtedly going to be a long one, by 2007 things were looking promising. At least they were until the collapse of Lehman Brothers and the subsequent end of cheap credit. Eastern Europe was stung particularly hard by the global financial crisis because its rapid growth was funded by exports to developed Europe and a credit boom from western European banks.
Double-edged sword
This devastating effect on the region’s growth prospects has been painfully prolonged by the seemingly never-ending rollercoaster of the eurozone crisis. As benefactor of western European prosperity its trade links and source of funds have dried up considerably in recent years, highlighting the region’s close economic ties to its richer neighbours.
To counter the risk of a collapse in the developing markets, initiatives were put in place to limit the damage caused by the erosion of western European finances. For example, the European Investment Bank, World Bank and European Bank for Reconstruction and Development pumped €30bn into the region last year, while the 2009 Vienna Initiative saw a pact between regulators and international financial institutions agreed to prevent western European banks from withdrawing from the region.
This, together with Mario Draghi’s commitment to keeping the eurozone together, has helped calm markets, but Neil Shearing, chief emerging markets economist for Capital Economics, still predicts several years of slower growth.
“Now the euro crisis is looming over the region, I think the next couple of years are going to be difficult,” he says. “We’re forecasting growth of 1.8 per cent this year and 2.5 per cent next, which is not necessarily a disaster given that much of the eurozone is likely to be in and out of recession, but it is well below the average growth rate of 6.5 per cent seen in 2002-08.
